Where to Find Income in the Age of Negative Rates
A Note about Risk: The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Moreover, the specific collateral used to secure a loan may decline in value or become illiquid, which would adversely affect the loan’s value. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. Lower-rated bonds may be subject to greater risk than higher-rated bonds. No investing strategy can overcome all market volatility or guarantee future results. The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy.
Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes. Although U.S. government securities are guaranteed as to payments of interest and principal, their market prices are not guaranteed and will fluctuate in response to market movements.
Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.
Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.
There is no guarantee that markets will perform in a similar manner under similar conditions in the future.
A basis point is one one-hundredth of a percentage point.
Duration is the change in the value of a fixed-income security that will result from a 1% change in market interest rates. Generally, the larger a portfolio’s duration, the greater the interest-rate risk or reward for underlying bond prices. A duration neutral approach means managing a fixed-income portfolio so that the portfolio has the same duration as its benchmark index.
A master limited partnership (MLP) is a type of limited partnership that is publicly traded.
Yield is the annual interest received from a bond and is typically expressed as a percentage of the bond's market price. Yield to Worst is the lowest yield that can be paid on a bond, assuming the issuer does not default. The calculation takes into consideration worst-case scenarios in which the bond would be paid prior to maturity. It is assumed the bond will be prepaid if current interest rates are lower than the current coupon rate.
The Barclays U.S. Aggregate Bond Index is an unmanaged index composed of securities from the Barclays Government/Corporate Bond Index, Mortgage-Backed Securities Index and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization.
The Bloomberg U.S. Treasury Bond Index is a rules-based, market-value weighted index engineered to measure the performance and characteristics of fixed-rate coupon U.S. Treasuries which have a maturity greater than 12 months.
The BofA Merrill Lynch 1-3 Year U.S. Corporate Index is an unmanaged index comprised of U.S. dollar denominated investment grade corporate debt securities publicly issued in the U.S. domestic market with between one and three years remaining to final maturity.
The BofA Merrill Lynch 5-10 Year U.S. Corporate Index is an unmanaged index comprised of U.S. dollar denominated investment grade corporate debt securities publicly issued in the U.S. domestic market with between five and 10 years remaining to final maturity.
The BofA Merrill Lynch U.S. High Yield Master II Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $100 million.
The J.P. Morgan Domestic High Yield Index is designed to mirror the investable universe of the U.S. dollar high-yield corporate debt market, including U.S. and Canadian-domiciled issues. It is a subset of the J.P. Morgan Global High Yield Index.
The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.
Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.